Italy’s ability to implement fiscal
austerity and reduce its debt burden is crucial to euro-zone
policy makers’ efforts to end the region’s debt crisis,
according to Julian Callow, chief European economist at Barclays
Plc in London.

“If Italy is in difficulties and is in need of financing
from the rest of the euro area, the rest of the euro area can’t
really stump up enough capital to support that,” said Callow in
a radio interview today on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “Italy is the key thing to address
because of its size and because of these unstable debt dynamics,
with interest payments that have started to emerge.”

Italy’s borrowing costs jumped today when its Treasury sold
10.5 billion euros ($14.6 billion) of bills and bonds, with the
shorter-term securities priced to yield the most in three years.
The country has to repay 298 billion euros of debt next year,
more than France, Spain or any other euro member.

Italian Prime Minister Silvio Berlusconi, struggling to
convince investors he can reduce Italy’s 1.9 trillion-euro debt,
agreed last night to resign by January in exchange for changes
on pensions, liberalization and bureaucracy, newspaper
Repubblica reported.

European Union talks with banks on bondholder losses as
part of a second Greek rescue package are deadlocked and have
been suspended, an EU official said. EU leaders meet in Brussels
today for the second summit in four days to try to reach an
agreement to bolster the region’s rescue fund, strengthen banks
and relieve Greece to avoid the contagion spreading.

“Italy doesn’t have so much heavy lifting to do in terms
of fiscal adjustment, but it’s proving hard to do that because
of the politics,” Callow said. “The markets don’t have
confidence and hence there is a lot of pressure there on the
Italian government.”

Italy was downgraded by the three credit rating companies
during the past month, starting with Standard & Poor’s on Sept.
19, on concern Berlusconi would struggle to reduce debt amid
weak growth and potential political instability.